South Korea Economy Watch

Monday, June 2, 2008

South Korean hopes for lower interest rates have been significantly reduced by the latest government figures showing that inflation surged to a seven-year-high last month on rising commodity prices and the weaker won.Consumer prices rose 4.9 per cent in May from a year earlier, after climbing 4.4 per cent in April, well above the Bank of Korea’s target range of between 2.5 per cent and 3.5 per cent.

The weaker won – it has depreciated more than 10 per cent against the dollar this year – is adding to pressure on policymakers, who are struggling to tame inflation as record-high oil prices dent economic growth. South Korea is the world’s fifth-largest importer of crude oil.

High inflation is dampening consumer spending in Asia’s fourth-largest economy, although the country is holding up relatively well due to robust exports. Exports were up 27.2 per cent at $39.5bn (€25.4bn, £20.1bn) in May from a year ago, while imports grew 28.8 per cent to $38.5bn, resulting in a trade surplus of $1bn – the first positive figure in the past six months. The increase was driven by strong demand for Korean ships, mobile phones and flat screens from emerging economies such as China and those in the Middle East.

The South Korean economy grew 5.8 per cent in the first quarter from a year ago.

Thursday, May 1, 2008

South Korea’s exports grew at their fastest pace in more than three years in April, as strong demand from emerging markets and a weaker local currency offset the impact of a US economic slowdown. Exports, which make up about 40 per cent of South Korea’s gross domestic product, shot up 27 per cent last month from a year earlier, exceeding March’s 18.6 per cent rise, according to figures released on Thursday.

Diversified markets and export products helped Korea weather cooling demand from the US and Europe, according to the latest data.

Exports to the Middle East jumped 43.9 per cent in the first 20 days of April and those to Latin America and China climbed by 28.5 per cent and 17.9 per cent respectively, while shipments to the US and Europe fell by 0.9 per cent and 2.5 per cent respectively.

The strong rise in exports comes as a relief to the new government, which is sticking to its 6 per cent target for economic growth despite the slowing global economy. But it adds to the dilemma confronting the Bank of Korea, which is under pressure to cut interest rates to boost sluggish domestic demand even as inflation rises.

The BoK is to hold its next monetary policy board meeting May 8. Thursday‘s strong export data is expected to ease pressure for the central bank to cut rates this month as consumer prices rose 4.1 per cent in April, above its 2.5-3.5 per cent target range.

Friday, April 25, 2008

South Korea’s economy grew at its slowest pace in more than three years in the first quarter of 2008 as domestic demand cooled, increasing the prospects of a near-term rate cut by the central bank. The economy expanded 0.7 per cent from the previous quarter, when it grew 1.6 per cent, the Bank of Korea said on Friday. Year on year, growth was 5.7 per cent, euqal to the rate in the previous quarter.

The near-term outlook does not seem to be too positive with the government expecting exports, which constitute 40 per cent of GDP in what is Asia’s fourth-largest economy, to slow in coming months as the global economy cools.

Domestic demand, which includes private and corporate spending, rose only 0.1 per cent IN Q1 - the slowest pace since the third quarter of 2004 - with growth in private consumption slowing to 0.6 per cent and corporate investment falling 0.1 per cent. Exports increased 12.8 per cent from a year earlier, down from a 17.7 rise the pevious quarter. Real gross domestic income, a measure of purchasing power, fell 2.2 percent from the previous quarter, when it rose 0.3 percent. That's the biggest drop since the fourth quarter of 2000.

Companies are beginning to scale back spending. Investment in new facilities fell 0.1 percent, after a 2.1 percent gain in the fourth quarter. Construction investment dropped 1 percent after a 1.2 percent increase.

The value of South Korea's shipments overseas fell 1.1 percent in the quarter from the previous period as prices for semiconductors declined. From a year earlier exports climbed 12.8 percent. Still, Choi Chun Sin, head of the central bank's statistics department, said that while the central bank expects export growth to slow, overseas shipments would still record "double-digit" growth for the rest of the year. Export climbed 31.5 percent during the first 23 days of April from the same period a year ago.

The outlook has worsened since January, when the Finance Ministry forecast consumer spending and construction investment would replace exports as the main drivers of economic growth. South Korea's jobless rate rose in March as builders and manufacturers shed workers, offering yet another signal that the economy's nine-year expansion is slowing. The number of people employed in the construction sector fell 1.9 percent from a year earlier and employment in manufacturing dropped 0.5 percent.

Unemployment edged up to 3.1 percent from 3 percent in February, the statistics office said today in Gwacheon.

These numbers are expected to add to pressure on the government to introduce measures to boost the economy. Kang Man-soo, finance minister, is quoted as saying this week that it would be difficult for the government to achieve the 7 per cent growth target for this year and stressed the need for a supplementary budget. He is urging the use of about Won4,900bn of tax revenue carried over to this year to build social infrastructure, something lawmakers from the ruling party strongly oppose.

Signs of a slowdown have been emerging as the pace of inflation accelerated to the fastest in more three years and the U.S. housing recession damps global growth.

In March, the leading economic index fell for a third month and the number of new hires declined to a three-year low. Retail sales slowed in February and factory output fell for a second month.

Consumers turned pessimistic for the first time in a year last month and manufacturers' confidence declined from a three- month high.

Meantime, the cost of servicing debt is rising. Lending by South Korean banks to households last month took the level to a record 367 trillion won, and the average lending rate stood at 6.95 percent in February, up from 6.28 percent a year earlier, according to the central bank.

The central bank has kept interest rates at 5 per cent for the past eight months but the BoK governor last month hinted at a rate cut soon, saying he was more worried about a slowing economy than inflation. Inflation hit a 3-year high of 3.9 per cent in March, above the central bank’s target range of 2.5 per cent to 3.5 per cent. The central bank left the seven-day repurchase rate unchanged at 5 percent on April 10. The bank last changed borrowing costs in July and August last year when it made quarter-point increases. Policy makers next meet on May 8 to review rates.

Meantime the won has strengthened, and is heading for its biggest weekly gain in three weeks as a rally in stocks spurred overseas investors to increase holdings of the nation's assets. Bonds are also set for a weekly gain.

The currency strengthened almost 1 percent this week, making it the best performer among the 10 most-traded Asian currencies outside of Japan. Korea's currency rose 0.5 percent to 991.25 against the dollar as of 10:03 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. Overseas investors bought more Korean shares than they sold every day of the week except one. The benchmark Kospi index climbed 1.4 percent.

Tuesday, April 1, 2008

South Korea's exports accelerated sharply in March on the back of rising shipments of oil products, cars and mobile phones to Asia and Latin America. Overseas shipments rose 19.1 percent from a year earlier, quickening from February's 18.8 percent gain, the economics ministry said in Gwacheon today.

Increased shipments to China and emerging markets have helped exporters to withstand faltering sales to the U.S., where the economy may be in a recession. Still, South Korean factory output fell in February and manufacturers' confidence for April deteriorated, reports showed yesterday, signaling companies expect demand may slow.

Commenting on the general situation in South East Asia, Vikram Nehru, the World Bank’s chief economist for east Asia and the Pacific (ie not including Japan and Australia), said on Tuesday the shift in export orientation was taking place faster than expected. “I didn’t expect such a rapid shift towards non-US markets as we are seeing,” he told the Financial Times yesterday "That is a sign of very adept marketing, as exchange rates and incentives change."

While annual export growth from emerging east Asian nations initially slowed from 22 per cent in January of last year to 15-16 per cent in the third quarter, it has since rebounded to 18-19 per cent.

The World Bank also said more sophisticated domestic production was allowing China to source more of its input needs internally.

“If this trend continues and if other east Asian economies are able to exploit these new opportunities in China’s domestic market then, over time, China is also likely to become an increasingly independent growth pole for the rest of east Asia,’’ the bank said.

Exports advanced to $36.2 billion in March and imports gained 25.9 percent to $36.9 billion, today's report showed. But Korea also posted a trade deficit of $668 million, the fourth consecutive shortfall. However, the March deficit was smaller than that in the first two months of 2008 as soaring oil prices reduced oil imports to 72 million barrels per day, down 10.8 percent from February. South Korea had previously enjoyed a monthly trade surplus for a number of years before starting to generate a deficit in December 2007.

Exports to China climbed 31.5 percent and sales to the European Union gained 21.4 percent in the 20-day period, outpacing a 10 percent increase in shipments to the U.S. China is South Korea's largest overseas market, buying 22 percent of exports. Manufacturing activity in China, the world's fastest-growing major economy, accelerated in March, a survey of purchasing managers showed recently.

South Korea's exports to central America and South America surged 49.6 percent in the first 20 days of last month from a year earlier, today's report showed. Shipments of oil products jumped 83.4 percent in the first 20 days of March and exports of mobile phones gained 48 percent. Exports of cars rose 28.5 percent in the 20-day period.

The Kospi index has dropped 10 percent and the won has fallen 5.8 percent this year on growing concern fallout from the U.S. housing recession and global credit-market slump will cool economic growth in coming quarters.

The 2008 trade surplus is likely to ``miss'' the government's target of $13 billion because of rising oil prices, Oh Jung Kyu, director general for trade and investment at the ministry told reporters in Gwacheon today. Import costs have increased as the price of Dubai crude oil, an Asian benchmark, surged 70 percent since the start of 2007. South Korea buys 97 percent of the fuel it needs from overseas.

Consumer prices accelerated slightly in March even as industrial production, investment and consumption are weakening. According to the National Statistics Office (NSO), consumer prices rose 3.9 percent in March over March 2007, up from a 3.6 percent gain in February, as surging crude oil and other international raw material prices raised costs of goods and services in Korea.

Seasonally adjusted inflation rose 0.9 percent from a month earlier, the largest increase since January 2005 when the month-on-month inflation jumped 1 percent. The 3.9 percent year-on-year growth is above the Bank of Korea's target range of 2.5 percent to 3.5 percent. The government is committed to trying to contain rises in consumer prices to below 3.3 percent this year.

Consumers felt the inflation burden more heavily last month since the cost of living index, consisting of food and other daily necessities, increased at 4.9 percent from a year ago, according to the statistical office. Manufacturing goods were up 6.3 percent, reflecting a steep rise in raw material costs, while prices of agricultural, fisheries and livestock goods fell 1.3 percent.

According to the statistical office, industrial output grew 10.1 percent in February from a year earlier, down from an 11.3 percent gain in January. Growth was lower than the market consensus of 12 percent and seasonally adjusted production fell 0.2 percent from a month earlier. Retail sales expanded 3 percent from a year earlier, down from a 4.6 percent year-on-year gain the previous month, while corporate facility spending on machinery and telecommunications declined 1.9 percent and orders received by construction companies also fell 6.2 percent.

Monday, March 31, 2008

South Korea's industrial production unexpectedly fell for the second time in three months in February, indicating economic growth may be cooling. Output declined 0.2 percent from January, when it jumped 2.5 percent, the National Statistical Office said today in Gwacheon.

According to the National Statistical Office (NSO) Monday, although industrial output fell month on month it still grew by a healthy 10.1 percent year on year rate in February on increasing production of semiconductors and audio and visual equipment. This compared with an 11.3 percent year on year gain in January.

Service output also increased at a slower rate of 5.9 percent in February from a year ago, down from a 6.8 percent growth the previous month. The finance and insurance sector saw output increase by 15.4 percent, but those of entertainment and sports-related sectors and educational service businesses fell by 3.4 percent and 3.3percent, respectively.

Tuesday, March 11, 2008

South Korea's won may fall considerably in the first half of 2008 as global credit-market losses lead overseas funds to sell holdings in Korean stocks according to a report out this week from State Street Global Markets.

The 3.1 percent drop so far this month in the Won's value vis a vis the dollar make it the world's worst currently performing major-exchange rate. Many economists consider that the decline will continue if the current-account deficit widens and the funds from stock sales continues.

Overseas investors have sold more Korean shares than they bought nearly every day this year on concern slowing global economic growth will damp demand for exports. Korea's won and the Indian rupee are the only two of Asia's 10 most-traded currencies outside of Japan that have weakened versus the dollar in 2008.

Cross-over equity flows, or purchases of stocks by overseas investors, into South Korea are the second weakest among the 29 developed and emerging-markets economies tracked by State Street Global Markets, the world's largest institutional money manager, and Korea's stock index has slipped 14.1 percent so far this year.

Korea's currency fell 1 percent this morning to 974.45 per dollar as of 1:41 p.m. local time, and this was the biggest decline since last August with the won reaching its lowest level since March 2006.

Korea's current-account is expected to run a $7 billion deficit this year according to the finance ministry yesterday, a figure which is twice the central bank's $3 billion forecast. Growth will fall short of 5 percent in 2008 and an earlier estimate of 6 percent because of slowing shipments abroad, Finance Minister Kang Man Soo said last week.

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About

Edward 'the bonobo' is a Catalan economist of British extraction based in Barcelona. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".
He is currently working on a book with the provisional working title "Population, the Ultimate Non-renewable Resource".
Apart from his participation in A Fistful of Euros, Edward also writes regularly for the demography blog Demography Matters. He also contributes to the Indian Economy blog . His personal weblog is Bonobo Land . Edward's website can be found at EdwardHugh.net.